Hilton Food Group, the UK-based meat packer, has built what one firm of City brokers describes as "a high-quality business" through international expansion and, in most of its markets, supplying only one customer. Dean Best spoke to Hilton CEO Robert Watson and CFO Nigel Majewski after the company reported a year of rising annual sales and earnings to discuss their strategy for the business and its plans for further growth.

In some ways, Hilton Food Group, the UK-based, own-label meat processor is building a business that looks at first glance, if not risky, a tad vulnerable.

Set up in 1994 to run a beef and lamb meat packing facility in England supplying Tesco, Hilton now does business in 15 markets, a group of countries 14 in Europe, plus Australia. However, in the main, Hilton's business centres on a relationship with one retailer in each market (its operations in a seven-market cluster in central Europe is the exception), prompting some industry watchers to wonder whether the company would be better served to broaden its customer base.

However, Hilton's latest set of financial results shows the company is in good health, with the business enjoying a year of top- and bottom-line growth in the 12 months to 1 January.

The numbers included double-digit growth in revenue and profits, prompted another rise in Hilton's shares (up more than 8% so far this year and in excess of 30% over the last 12 months) and sparked analysts at Shore Capital to describe the business "as a class act".

Speaking to just-food the day the numbers were announced, CEO Robert Watson, who joined Hilton in 2002 from Northern Ireland-based beef processor Foyle Food Group (which he founded with his father), describes the company's way of doing business as "the optimum model to work with".

"You actually get closer to the retailer. A retailer tends to want to use meat very much as an important part of their offer with regards to building traffic and creating differentiation. They want to have a specific way to do that so the best way you can do that is to work with the biggest retailer in the market and put their volumes to work for them," Watson says. "Say you bring two or three customers into the one factory; you don't get the synergies you'd get because every retailer has a different supply base, packaging format and supply chain. That creates some complexity. We can have a facility operating with a business where the retailer's got the biggest scale in the country, we can create the most efficient supply chain."

From 2000 to 2011, Hilton built its business in continental Europe, setting up facilities in the Netherlands, Ireland, Sweden, Poland and Denmark. Hilton also works with Tesco in Ireland, while in three of the other countries, a plant works with one grocer. In the Netherlands, Hilton supplies Ahold Delhaize's Albert Heijn chain (also supplying the retail giant's stores in neighbouring Belgium). In Sweden, the company packs for ICA Gruppen. Across the border in Denmark, Hilton works with Coop Danmark.

In Hilton's seven-country central European cluster, the company's model is different, where its facility in Poland supplies Ahold Delhaize, Tesco and Rimi across the region. Hilton's facility in the Polish city of Tychy supplies Ahold Delhaize and Tesco stores in the Czech Republic and Slovakia, while also working with the UK retailer in Hungary and Poland. The Tychy site also works with ICA in the Baltic states, supplying the Sweden-based retailer's Rimi stores in Latvia, Lithuania and Estonia.

Hilton, then, has decided to base its diversification through geographic expansion and Watson stands by the strategy.

"What normally happens is the current suppliers that are supplying the retailer just fit into a new supply chain. They don't lose their business but they lose the opportunity to maybe do the retail packing – but they can centre their business in the supply of the raw materials," Watson explains. "We can prove that we can bring expertise into the supply chain, allow the retailer to focus on their core strengths and we focus on ours. We have proved that we can enter a lot of new, diverse-type markets and deliver that model."

Asked if Hilton foresees any risk from a strategy largely based on one retail customer per market, Watson replies: "You could say that but then I would put back to those that asked that question: 'Would you rather that we're a UK company and supply everybody in the one market? Or is it better for us to have a lot of businesses in different markets?' So, in other words, we could turn around and say 'Well, the world is our market' and we just supply different people in different geographies, instead of being a singular regional supplier who supplies everybody in the one market."

In Hilton's last financial year, which ran until 1 January, the company generated revenue of GBP1.23bn (US$1.52bn), up 12.8% on the previous 12 months. The group's operating profit increased 18.4% to GBP34.3m, while its net profit rose 23% to GBP24.6m.

The decline in the value of sterling gave a bit of a boost to the numbers. Hilton's expansion strategy means, based on its 2016 results, 74% of the company's volumes are produced and sold outside the UK. At constant currencies, Hilton's revenue grew 7.2%, while its operating profit increased 11.7%.

However, with underlying volumes up almost 9%, there is justification for CFO Nigel Majewski to describe Hilton's last 12 months as "a very strong year", adding "we're very pleased with the results".

Majewski says "a lot of the progress" was through Hilton's business in Australia, where the company has had a venture with Woolworths Ltd, the country's largest food retailer, since 2013. The companies now work together on three facilities across Australia. The venture saw its volumes in Australia more than double last year as its site in Melbourne ramped up production towards its normal operating capacity.

Majewski says Hilton's venture in Australia accounted for around six percentage points of the company's 8.9% rise in volumes. "It's become a material part of the business," he says.

Majewski counts Australia among the factors behind Hilton's forecast for its growth in its current financial year. "We're not giving out a forecast, all we're saying is we're comfortable with the analysts estimates that are out there. Looking at their consensus now, I think their profit before tax is about 9% growth. That's the kind of level that's out there and we're comfortable with it," he says. "There are three [factors] potentially. One is a full year of foreign exchange translation benefit, by virtue of the fact that the currencies all strengthened after June 24th last year. Second thing, we've got the Australian JV continuing its growth path, so a good year there we'd like to think is possible and also [in] western Europe."

Hilton classifies "western Europe" as its operations in the UK, Ireland, the Netherlands, Sweden and Denmark. Last year, its comparable, 52-week volumes (the previous financial year had 53 weeks) rose 3.8%, with the company pointing to "good volume growth" in the UK and "encouraging growth in our Irish business".

The division's sales increased 7%, also boosted by the launch of UK meat trading arm Hilton Food Solutions, which Watson describes as "like a dating service for meat". He adds: "It's not going to be a business we're going to set up in every country, but it's something that we can support as a bolt-on and we've alluded to this in the past where we believe we can use our skillset, our reputation with a respect to market, to enhance a range of services we offer, we will do so, and I think this is an example of it."

Not each of Hilton's business saw volume growth last year. In central Europe, Hilton volumes fell 4.5%, with the company citing "competitive headwinds". That said, Hilton said its sales in the region rose 8.8% on a constant-currency basis, boosted by increased raw material prices and "a mix shift into beef".

Broadly, though, Hilton's full-year figures were welcomed by the City. Shore Capital, which has a 'buy' rating on the company's shares, said it was "positive on Hilton Foods' short and medium-term potential".

"Sonae tried with a JV partner before. It didn't work [and] they set up their own facility. They really found it difficult to operate it. We come in and show them what an expert can do and we have proved that beyond a shadow of a doubt, [given] how that is performing. We're now re-equipping and bringing it up to a modern facility," Watson says.

Hilton's result statement included the line: "A strong ungeared balance sheet gives the Group considerable flexibility for potential future expansion. Given our propensity to generate free cash flow, we also consider that we are likely to have financial capacity for further expansion taking account of the recently announced expansion plans in Portugal and Queensland, Australia."

Asked if there are more international markets on the horizon for Hilton, Watson is coy. "We're continuing to look at a number of markets and talk to a number of retailers in new markets, [while] we always say we're looking at how we can expand our existing business in our existing markets, Australia being the prime example," he says. "So, yeah, we continue to have a number of discussions and we would be optimistic that we would continue to expand our business in a geographical sense. We are looking at markets. We continue to look at markets within Europe and outside. I can't be more specific than that."

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